August 11, 2012

I’ve been known to say that I was present at the creation of “shareholder value.”

It’s an exaggeration, of course. But in 1982 — literally half a lifetime ago for me — I wrote an article about the first big takeover attempt by T. Boone Pickens. One of his central justifications for the takeover movement that he helped spawn was that company managements didn’t care enough about the company’s owners, a k a the shareholders. Their cash-based compensation wasn’t properly aligned with the desires of shareholders. Shareholders, he believed, need to assert their primacy — and force executives to start paying attention to the price of their companies’ stock. I later learned that Pickens was not the first person to make this argument — academics had already created the theory that undergirds it. But, at the time, it was still a pretty radical view.

The rise of the theory of shareholder value has been good for shareholders. On August 12, 1982, thirty years ago tomorrow, the Dow Jones Average stood at 776. On August 12, 2012, it stands at 13,208.

Most of the attention in public discussions of the increase in profitability of big corporations over those 30 years has been about cost-cutting, and rightly so. Yet, very little attention has been paid to the possibility of collusion, which therefore interests me.

To equate "shareholder value" with stock price is an egregiously gross over simplification, if it can even be called such.

I'd much rather own a $1 stock that gave me $2 annual dividends, or a $1 stock that came with net assets of $10, or a $1 stock that will be worth $10 in a year than a $1 stock that was actually worth $1, or $0.10. The one exception is if I need money right here and now. Then I want that $1 stock to be worth at least $1, preferably less as I will be getting out at the right time.

But shareholder value, IMO, is more to do with taking a decision that will ultimately make the shares themselves more valuable over time, which should ultimately be reflected in the stock price but may not in the short term (a time span that can be measured in years). As a shareholder, I want the board's eye on the ball of creating value by being a better company. I might care about what the stock price will be in 5 years, but what it is today, tomorrow or next quarter should be immaterial to the board and CEO.

Of course, shareholder value needs to be reigned in when a monomaniacal focus on it leads to actions like dumping toxic waste in rivers because you'll probably get away with it, or hiring factories full of illegal immigrants etc. The appropriate place to do so is via the government, IMO. Unfortunately, the political parties are paid lots of money by those whose job it is to increase shareholder value, and therein the problem lies.

In the age of DJs who riff on other artists' music and endless file-sharing on the internet, isn't plagiarism a dead concept? We are living in the age of viral memes when who know what came from where and why.

"The rise of the theory of shareholder value has been good for shareholders. On August 12, 1982, thirty years ago tomorrow, the Dow Jones Average stood at 776. On August 12, 2012, it stands at 13,208."

1982 coincidentally was the start of a secular bull market, which ended in March of 2000.

Executives, the Fed, accountants, regulators and those who sell financial products.

As long as the Fed printed cheap money, the executives lied, the accountants signed off on it, the regulators slept at the switch and people kept buying the bullshit, the bubble kept inflating and those on the inside kept making money. Everyone knows the system is rotten to the core, but no one does anything. Pensions and especially 401ks were the fuel to the fire.

One moderate sized economic hit, *anywhere* in the world, could bring the system down. Look at what happened with Knight Capital Group's fuckup... Wall Street raced in to contain that fire, and it was only $400 million.

As an aside, were there any real financial crises in the US from the Great Depression to the early 1980s? Once the Reagan era of deregulation got going, they seemed to start popping up more often. S&L crisis, Mexico and it's Brady Bonds, LTCM/Russian default and the Asian Flu.

Lugash -- financial crises did not just happen with Reagan. They were a regular feature of life in the colonies, and later after independence. The crash of 1873 ushered in what amounted to a near twenty five year depression, with true recovery only happening in the late 1890's. The panic of the early 1900's, the 1948 recession, the 1973 oil embargo, all come to mind. As do earlier panics in the 1840's, and late 1700's.

Panics and financial busts have happened ever since money was invented in the Kingdom of Lydia in the 700 BC era. There's just no getting around it.

Steve is obviously behind the times, already the FT is declaring the end of Equities with guys like Mohammed el-Arian and Bill Gross of Pimco largely agreeing. As noted, the secular bull market rode cheap US energy and military dominance of same and a long domestic expansion.

All that open borders and mass third world immigration happened in places where shareholders either did not much exist or were screwed over for a vaunted socialistic third way: Sweden, Norway, Finland, Denmark, and Germany with their "social model" having unions and the government on board and not worrying about prices on the Bourse. Italy has no real stock market at all, its nearly all privately owned companies, and its awash with Africans and Arabs. The same holds true for Spain.

What Steve has grappled with, but not fully recognized, is how intertwined (like the Tidewater Aristocracy) the corporate, media, and government elite are. They all attend the same schools, broadly know each other, come from the same families, espouse the same liberalistic values, mouth the same PC platitudes, and owe their standings for the most part NOT to ability and boldness but by going along to get along in a milder version of China's Red Princes.

That in a nutshell is it. Leadership inept, stupid, clueless, and as moronic as any you'll see in Spike-TV's "Bar Rescue."

Almost all institutions are not making much money, really, and that includes banks, movie studios, publishing houses, tv networks, and the like. Its why they take stupid risks and make dumb moves (like "save the foam" type things such as dealing with Mexican drug dealers or IRAN to earn a few million in fees).

Only institutions with charismatic, able leaders who have "reality distortion fields" (i.e. cut through PC platitudes and old attitudes) have out-performed the miserable average of most companies post 2000.

A follow up. Look at James Cameron. Supposed "visionary." His massive investment in 3-D has failed. This just in, its a gimmick. Older audiences don't like the headaches it gives, most of them wear corrective lenses, and have poor eyesight. Three-D is expensive, and most of the content has been less than compelling.

So he's announced a deal with China to jump-start 3-d films and equipment manufacture. Remind me how successful Nintendo was with their 3-D system?

I'd attribute the badness of corporate leaders to an insular life that is as removed from social reality as well, a millionaire movie director living in slew of Gatsby like mansions. None of them can actually SEE what they do; and write off opposition to "haters" and jealous people, while they themselves espouse ultra-liberal stuff to be liked by Bono and Cher who are their near peers.

And this happens in zero-shareholder value places like Italy, Sweden, and Germany as much as the US. Japan ALONE has not been swamped by mass immigration, likely because people were already jammed too tight in cities, mass immigration would lead to the Otaku taking up swords and knives and transforming from grass eaters into the kind of men their grandfathers or great grandfathers were: the scourge of Asia. Anyone perusing Japan's social and political and economic leadership from say, 1990 to today will not be favorably impressed. Tokyo was just so crowded there was not room for an extra five million Somalis or such.

"Panics and financial busts have happened ever since money was invented in the Kingdom of Lydia in the 700 BC era. There's just no getting around it."

Yes there is.

The banking restrictions put in place after the last time the bankers plunged the world into depression and eventual global war prevented them doing it again for 70 years until they bribed the politicians to take all those restrictions away again.

It is a fundamentally flawed system to have the money supply in the hands of the people who profit from increasing the money supply.

While that system persists - and worse as it becomes more globalized - the worse the consequences of that flawed system will be for the majority.

The old elite understood which was why Jefferson et al were so opposed to the central banking system.

."That in a nutshell is it. Leadership inept, stupid, clueless, and as moronic "

The leadership are funded by Wall St. so if they are inept, stupid and clueless (and totally corrupt) it is because Wall St. WANTS them that way.

We're not in a democracy we're in a puppet show where the bankers own both sets of puppets.

lol come on whiskey. avengers 3D just made 600 million in the US and another 800 million outside the US, for a total of 1400 million. that's 1.4 billion dollars. this puts it at number 3 all-time behind only avatar and titanic.

Japan ALONE has not been swamped by mass immigration, likely because people were already jammed too tight in cities....Tokyo was just so crowded there was not room for an extra five million Somalis or such.

England, the Netherlands, and Belgium each have greater population density than Japan:

"Yet, very little attention has been paid to the possibility of collusion, which therefore interests me."

It has gotten renewed attention in the current crisis as an explanation as to why there is not more downward pressure on prices to absorb excess supply. Overt collusion is not necessary. For example, the biggest corporation in an oligopoly can be the price leader, and other corporations take their cues accordingly. The subject was famously discussed by the late Marxist economists Paul Baran (of Stanford University) and Paul Sweezy (of Monthly Review magazine) in the book they co-wrote, Monopoly Capital.

Yes, Whiskey nailed it as far as why the liberals persist with what they do. They don't see and/or don't understand.

When your only contact with non-whites is with those whose employment depends on kissing your ass, you are not going to get an accurate view of them. They may also come into contact with non-whites who have "made it", in which case they are also dealing with an unrepresentative sample.

Then there is the capability to understand what is going on, which requires some logical and mathematical ability. How many arty people really understand statistics?

Then there is the child rearing aspect. A lot of Hollywood is homosexual. They often don't have children, and without children you usually don't start thinking about or caring about what their world is going to be like. Meanwhile, hedonism pays off now.

And while there are a few women who apparently post on isteve (e.g. jody, kylie), most women don't like thinking about politics. A lot of those who do, tend not to have child raising as a primary focus.

The end result of this is that most of the elite, especially the Hollywood elite, aren't willing or able to see or understand that things need to change.

None of this is really new though, it is a natural tendency of elites to be insulated from their subjects or hosts unless they are wise enough to break through that insulation somehow. How many wars have been fought throughout history because an elite did not see the writing on the wall? Reform often only comes after a nearby elite has foolishly stuck with a policy of cake consumption advocacy.

First, Japan is larger than UK, Germany, or Italy. Most people (i.e, idiots) tend to think that Japan is just a supersized Hong Kong or Singapore, but it is actually a fairly big place.

Second, Japan is one of the most heavily forested (>70%) countries in the world. Plenty of room for new apartments there.

The reason Japan hasn't suffered mass immigration is that, for better or worse, there is still substantial ethnic solidarity amongst the Japanese which results in Japan being run for the benefit of the Japanese.

It is for the same reason that Wall Street has developed such a deep loathing for Japan over the past 20 years.

Anyone who criticizes Japan's leadership should show me a place where the government does as good or better a job looking out for their nationals as does Japan rather than simply running their country as some sort of labor camp for the lowest bidders.

I'm currently dieting, and my beef with carbs (har har) is less about what the studies say and more about calorie counting. A turkey sandwich on whole grain gets 220 calories from those two slices of bread and 90 from the lean turkey. Bye-bye, bread. I tried the meat and mayo wrapped in a big piece of green leaf lettuce last night. It was delicious.

And while there are a few women who apparently post on isteve (e.g. jody, kylie)

LOL, here we go again...

I suppose it's a good thing you've got so much churn in the ranks of the commentariat, Steve. Means you're always bringing in new readers.

All that open borders and mass third world immigration happened in places where shareholders either did not much exist or were screwed over for a vaunted socialistic third way: Sweden, Norway, Finland, Denmark, and Germany with their "social model" having unions and the government on board and not worrying about prices on the Bourse. Italy has no real stock market at all, its nearly all privately owned companies, and its awash with Africans and Arabs. The same holds true for Spain.

America, shareholder central, has gone from 90% White to 65% White and falling since 1965. Germany is 90% White (and German, I think) today. I doubt one of the countries you mention is less than 90% native stock.

What Steve has grappled with, but not fully recognized, is how intertwined (like the Tidewater Aristocracy) the corporate, media, and government elite are. They all attend the same schools, broadly know each other, come from the same families, espouse the same liberalistic values, mouth the same PC platitudes, and owe their standings for the most part NOT to ability and boldness but by going along to get along in a milder version of China's Red Princes.

No, they don't. A substantial portion of that elite is Ashkenazi. And Ashkenazis are not liberals. They're "rice liberals." Rice liberals, like rice Christians, join the coalition because it puts rice in their bowls, not because they believe or follow the rules. That's why real liberals recoil in horror at the idea of having ethnostates for themselves, while rice liberals love the idea and pursue it vigorously and shamelessly.

And this happens in zero-shareholder value places like Italy, Sweden, and Germany as much as the US. Japan ALONE has not been swamped by mass immigration, likely because people were already jammed too tight in cities,

Absolutely wrong. None of the countries you mention has been swamped by mass immigration the way the US has, despite the fact that they had less "diversity" to begin with.

Your posts are educational, though. They're so WRONG that they force people to correct them, and everybody who didn't know gets to find out.

Yes, Whiskey nailed it as far as why the liberals persist with what they do. They don't see and/or don't understand.

That's like nailing "water's wet." Of course an elite determined to ruin a country is obtuse - deliberately obtuse (either their own deliberation, or deliberation trained into them by someone else). This is a feature for them, not a bug. If they listened and changed, they'd have to eschew their goals.

To equate "shareholder value" with stock price is an egregiously gross over simplification, if it can even be called such.

Gross and deliberate oversimplification.

The Corporate Report looked at modern accounting with Fixed assets depreciated at different rates over different times by different companies and other things that made company accounts difficult to compare and recommendations were made.

Shareholder value was a theoretical amount that was left over after other expenses were met and was owned (owed?) to the shareholders.

It never meant stock price but MBAs who were working out in other studies that aligning managements interests with those of the company by giving management more shares in the company misinterpreted it this way to suit their agenda.

To all the anonymii who post just a link with no explanation - that 'adds no value', and is annoying. It makes the reader do the work of copying and pasting the link, before they know whether they're even interested. Steve it'd be fine by me at least if you didn't approve those.

"The rise of the theory of shareholder value has been good for shareholders. On August 12, 1982, thirty years ago tomorrow, the Dow Jones Average stood at 776. On August 12, 2012, it stands at 13,208."

And yet, despite the fantastic increase in the Dow, this country is considerably shittier than it was in 1982. What's the value of America's stock now, compared to 1982? How valuable are our shares in citizenship?

A lot of the increase in value of the Dow and the S&P 500 is due to their outsourcing of whole industries. So that now, many of your fellow citizens, who might have had gainful employment in a mill or factory, now aspire to little more than becoming tweekers, smurfs, and meth-cookers. People who in the past might have owned their own hardware store now work as wage-peons for Home Depot.

In many cases CEO’s actually WANT to do the right thing by their employees, customers, and country, but theare hostages of the cult of shareholder value (i.e., raising the share price). For example, many CEO's have said they would love to (and hope to) manufacture in the US, most recently Tim Cook of Apple. But the shareholder value directive means they can't do it unless the math shows they would make more money for shareholders building a factory in the US than in China. The government should help them do what they want to do by imposing tariffs.

Anon, propagating work because of your own laziness is worse IMO. This is a niggling example, but consider the fact that the work he avoided is multiplied by the number of people who copy-pasted the link.

Just a pet peeve of mine, how 1 person can save dozens, hundreds, or thousands of people some labor with a few extra moments of his own time, but doesn't give enough of a shit to do so.

"But the shareholder value directive means they can't do it unless the math shows they would make more money for shareholders building a factory in the US than in China. The government should help them do what they want to do by imposing tariffs."

Yes i think there's a lot of truth in that. The overturning of the traditional imperatives in the 1980s drove everyone along the same path whether they liked it or not.

I think that links should be described, for the reason that Svigor described.

One issue with making clickable links: That way, the people that make and maintain websites that are linked to can easily find out which websites link to their website. That might not be good in our case.

Maybe not, but I doubt the emphasis on shareholder value was the cause. More likely, both shared the same cause: extremely low stock valuations, as investors had largely given up on stocks by the end of the secular bear market that started in '68. Similarly, the previous secular bull market that started in 1950 was sparked by low valuations. In both cases -- 1950 and 1982 -- stocks traded at single-digit P/E ratios, and were cheap according to other metrics as well.

This is a pattern that repeats itself: after the end of a long secular bull market, investors flee stocks, and they get cheaper on a valuation basis (P/Es go down, dividend yields go up, etc.). At some point, they become attractive enough that investors come back in, and that's the start of a new secular bull market. In between, there are shorter (<5 years) cyclical bull and bear cycles, but the secular bear markets tend to last roughly as long as the bull markets that preceded them. E.g., the 1950-1966 secular bull (16 years) was followed by the 1966-1982 secular bear (16 years) which was followed by the 1982-2000 secular bull (18 years) which has been followed by the current secular bear (2000- ).

""But the shareholder value directive means they can't do it unless the math shows they would make more money for shareholders building a factory in the US than in China."

I forgot the other half of it. It was around the same time that hostile takeovers were made a lot easier - mostly through the advocacy of a particular Wall St lawyer whose name i forget. Increased ease of hostile takeovers combined with the shareholder value idea creates an offshoring conveyor belt whether individual CEOs liked it or not. If they didn't do it they'd be taken over and someone else would.

And some people post links that you may not actually want to click on. At least by copying and pasting the URL yourself, it gives you a chance to reflect on where you are going.

A quick description will fix that. Actually, a quick description is more of a common courtesy than a hyperlink. Also, trying a decent browser like Firefox can solve the mystery, since a small pop-up reveals the URI of a hyperlink when you hover over it.

So he's announced a deal with China to jump-start 3-d films and equipment manufacture. Remind me how successful Nintendo was with their 3-D system?

The Nintendo 3DS was very successful:

http://en.wikipedia.org/wiki/Nintendo_3DS#Sales

"Prior to its launch, Amazon UK announced that the system was their most pre-ordered video game system ever.[160] Nintendo of America announced that the number of Nintendo 3DS pre-orders were double the number of pre-orders for the Wii.[161] The 3DS is also the fastest selling console in Australia, with 200,000 units sold through 37 weeks of availability. The 3DS overtook sales of all other consoles, handheld and home, to claim this record.[162]"

Maybe not, but I doubt the emphasis on shareholder value was the cause. More likely, both shared the same cause: extremely low stock valuations, as investors had largely given up on stocks by the end of the secular bear market that started in '68

Looked for the quote that in the '80s it was cheaper to look for oil on Wall Street than to prospect for it because these companies owned drilling rights somewhere and these were undervalued by investors and a takeover boom was founded on the fact that assets were undervalued in the stock price.

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